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The Mother of All Bubbles
Part One in a Three-Part Series
 

By Philip J. Romero


College commencement season just ended. Long after the speeches fade from memory, the tuition bills will remain. And for many parents, their kids will remain too, in their basement, educated but underemployed. What follows is an inside perspective on a declining industry.


College is a deeply held conviction for most Americans, seen as a prerequisite to enter the middle class. Questioning college is borderline un-American, like showing a fondness for autocracy, or for collective ownership of the means of production. But higher education has suffered a number of self-inflicted wounds and its popularity may have peaked.


"Bubble" is a word that describes an asset -- stocks, bonds, houses or gold -- when fundamental value no longer sets prices, and speculation takes over. Naive investors bid prices higher out of the belief that the future will mimic the past: Since the asset's value has risen, it will rise again.


College is the mother of all bubbles.


Bubbles start with a germ of fact: Something makes the asset more valuable. The internet really did open up enormous new avenues for commerce and competition, so the dot-com bubble was borne of reality. Similarly, college in the postwar years offered powerful economic advantages to graduates -- in their lifetimes, they could earn over a million dollars more than high school graduates.


College may have had an exceptional return on investment in, say, 1960, when only about one in 10 adults held a bachelor's degree and four years of college cost less than one or two years of median income. Fifty years later, college graduates are far more plentiful, and tuition has risen much faster than incomes. Although in the early postwar years a college degree paid for itself (in increased earnings) within a year or two, today payback can take decades, at least. Several generations of American students, and their parents, took a good idea and grossly over-invested. This is textbook bubble behavior.


Like other bubbles, the college bubble has been fueled by debt. Outstanding student loan debt has skyrocketed in the past decade as the Obama administration "solved" college access by subsidizing demand, which blunted any pressure on universities to control costs.

 


 

Colleges have hiked tuition at three times the inflation rate because demand is boosted by cheap loans and by customers' religious faith in the value of higher education that has dulled their price sensitivity. College shares the same privileged economic position as health care -- both are seen as necessities, at any price.


There are clear signs that we may be near a top; the bubble may be near bursting. Customers are showing clear signs of tuition fatigue. For example, this spring the Oregon Higher Education Coordinating Commission rejected the University of Oregon's and Oregon State University's proposed tuition increases. In stock market terms, higher ed may have hit a resistance level.


Like many aging bull markets, college degrees have been over-consumed and devalued. On average, a degree still offers a decent return on investment. But averages conceal wide disparities. To send your kid to college with a clear conscience, it is important to tilt the economic odds in their favor. Next month's column will explore some aspects many parents forget.


Look for Part Two in the July newsletter --
Four Key Value Factors to Consider Before College Enrollment

 

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Q & A with Joaquin Lippincott, CEO of Metal Toad


 

How many employees does your company have? When did you start it and why did you choose Portland?

 

Metal Toad currently has around 60 employees, and we are growing at around 20 to 30 percent per year. So, assuming the market holds steady, we'll continue to add people.

 

I started the company 14 years ago in San Diego, and I moved up to Portland 11 years ago following my first employee. That particular employee was in the Bay Area at the time, and when we offered to relocate him, he chose Portland. Since I followed him up, there's a certain amount of luck to my being here. I have found Portland to be a great city, and I am proud that my second child was born in Oregon.

 

The easiest way to sum up what we do is to say we build software for companies. It's a little more involved than that as we actually help them decide how to build things, or what software to purchase as well as helping them to roll it out in the cloud and then support it over time. Examples: We're helping a major truck manufacturer build fleet management software, and working with Siemens Wind Power on software that reduces costs for offshore wind turbines. We're helping pioneer the future of live sports viewing, and managing web and mobile properties for entertainment companies like Sony, DC Comics and the Golden Globes.

 

 

According to the state's Office of Economic Analysis, using data from 2015, Oregon's high tech sector makes up 25 percent of the state's GDP and 45 percent of its exports. Why do you think Oregon's economy is dominated by the technology industry? Is this a good thing?

 

Over the past 10 years, Portland has simply been the last affordable city on the West Coast. Tech refugees from Seattle and California stumbled on it and realized this was a place they could afford to buy a house and raise a family. Once a nucleus of tech was established here, word got around about a green paradise with low cost housing, great food, excellent public transportation and progressive politics, and it's been nonstop growth ever since. The reason tech is such a bright spot for GDP in Oregon -- there are effectively no capital costs required in its production, no harvest to wait for, no roads needed for transportation, and no export or import tariffs. Not only that, but the reach of software is global, and any revenue captured is transported instantly back home, which is then converted to salaries and profit.

 

Because the ascendance of software in Oregon is largely a Portland phenomenon, we can look at cities like San Francisco to see the natural progress of reliance on tech. Left unchecked, software is an incredibly efficient engine to draw capital into a community and concentrate it among a small group. The Bay Area shows us what that looks like: gentrification of entire urban areas through hyper-localized inflation caused by salary growth. I believe that software can be an incredible force for good within a community, but only if we change the prevailing model to create a significant increase in the number of entry-level jobs available.

 

 

Should Oregon's technology leaders/executives have a duty to invest in the state for the longer term, both economically and civically? How would you describe the investment perspectives/attitudes of your technological brethren?

 

Whether Oregon's tech leaders have a duty to invest in the state is irrelevant. The answer to that is yes, but the more important question is: Will they? Unfortunately the answer to that is likely no. Due to the financial structure of most tech start-ups, they have almost zero incentive to invest in anything other than their own company. They don't require infrastructure investment, and they generally live in a bubble where everyone they know is well-compensated and loves their job. Layer on top of that, they generally come from out of state and have large buckets of money and investors who require progress on a one-, two- or three-year horizon, and you have a recipe for almost no economic or civic engagement. I find this incredibly ironic given the progressive politics of the tech industry, but there is almost no interest in things that are not directly related to tech.

 

 

Oregon economist Josh Lehner estimates that Oregon's tech sector has leveled off in terms of job growth in the last 12 months, while nationally the sector has been booming -- Google, Apple, Microsoft, Amazon, etc. The Oregonian's Mike Rogoway quotes Josh Hartung, CEO of PolySync (an autonomous driving start-up): "People move to Oregon to settle down ... the net effect is we don't shoot as high as some other cities on the West Coast, and also frown on those that do." Is there any merit to the idea that Portland is a "lifestyle" city and that we suffer from an innovation deficit?

 

People move to Portland because they are tired of the rat race, but they still want to live in an urban center. For the past four years there's been significant investment in tech from out-of-state investors who saw relatively low salaries for similarly experienced talent. But salaries have been bid up by more than 40 percent over the past four years. Not only are we approaching parity with some of the larger cities (the Bay still pays a significant premium), but we have developed a reputation as being "lazy." That is to say, programmers in Portland want to work around 40 hours per week, not the 60 to 80 hour grind that some of the larger metros see. Personally, I know it is possible to find amazing talent, incorporate work-life balance and turn a profit, but I know several Bay Area companies with satellite offices here that are regretting their investments and at least one considering pulling the plug on their Portland office and moving everyone to a different city on the West Coast.

 

 

Since the recession of 2008-9, Oregon has seen growth in high-wage jobs and low-wage jobs, but a decrease in middle-income jobs. Why? What's driving the disparity that the state economist refers to as "Oregon job polarization"?

 

Automation is to blame for both the rise in high-income jobs and the decrease in middle-income jobs. Middle-income jobs were expensive enough that it was worth the investment into software and hardware to "optimize" the jobs away. This automation also created a number of higher income jobs for the knowledge workers that build, maintain and improve the automation tools. The lower income jobs have increased simply because the economy has grown and the labor is too cheap to warrant replacement. Unfortunately, the increase in the minimum wage will hasten the replacement of those existing jobs causing additional job loss in the lower income jobs and an additional increase in high paying jobs. Despite this impending disaster, I am not in favor of freezing the minimum wage, as eventually all jobs that can be automated will be. Instead, by raising the minimum wage we will propel ourselves into the future, making ourselves natural centers of the automation revolution. States and countries that hold on to low paying jobs will eventually face an even bigger collapse as those industries supported by cheap labor are supplanted by even cheaper robots (that were designed in places with high minimum wage). In Denmark, by way of example, it is cost prohibitive to hire someone to mow your lawn because labor is so expensive. The net result? Most people own a robot lawn mower.

 

 

The average salary for a tech employee in Oregon is $106,000 annually, more than double the state's median salary of $48,000. Yet last year on your blog you wrote, "The Software industry is facing a workforce shortage of unprecedented proportions. The Bureau of Labor Statistics is projecting a shortage of 1 million people over the next five years -- when they compare the number of jobs that will be posted that require a Computer Science degree versus the number of graduates the university system will be able to turn out." If the industry pays so well, why is there a shortage of entry-level programmers?

 

The problem is multi-faceted, but the short answer is this: It's not that there aren't enough entry-level programmers, there aren't enough entry-level jobs. Being a programmer is not unlike being a different type of professional, like a doctor, lawyer or an accountant. If you are like most people, when you go to see a doctor you want someone who has experience. And the more serious your need (heart transplant, etc.), the more selective you are likely to be. As a result, in most professions, there is a strong pattern of apprenticeship; doctors have residency, lawyers have to work their way up, and accountants start with paperwork. In programming, there is no parallel. Let that sink in. How on earth would we ever have the right number of doctors if all the doctors in the world had to fend for themselves for the first part of their career? Imagine all the terrible misdiagnoses and surgeries gone awry, and that's basically the state of tech. Given this context, it is no shock to me that we have hacking events that surface all the time. To make matters worse, this has created a culture that worships the senior developers and scorns "newbies." Once you are established in your career it's great, but trying to break in is very difficult. Play this scenario out year-after-year and it's easy to see why salaries are so high and people have such a hard time getting started. We don't have a talent shortage; we have a broken talent pipeline.

 

 

You recently started a nonprofit to help create vocational programming schools and apprenticeships (The Open Source Apprenticeship Model) as part of the solution to this problem. Why haven't the brick and mortar universities been better at anticipating and solving this problem? Do you think your nonprofit approach can train the numbers needed in our area in future years?

 

Brick and mortar universities are very interested in being part of the solution, but the pace of tech is blinding and our university education system moves at a deliberate speed. Technology changes every year, and it can take years to get a new curriculum in place. That said, I have met with and seen interest from PSU, OSU and PCC. Our VP of technology, Tony Rasmussen, is now on a curriculum steering committee for PCC. Certain universities like Stanford and Berkeley have gotten a jump on the rest by staying in lockstep with large tech companies in their area.

 

The real gap in the industry is entry-level jobs, which is a barrier not only to people looking to shift careers via some of the code boot camps, but also university graduates who may have trouble finding their initial entry into the industry. My hope with the nonprofit, the Professional Alliance For Tech Hires, is to celebrate companies that are creating entry-level jobs and to provide a space where they can share experiences with one another regarding what works and what doesn't. While I don't know that we can solve everything, there are a lot more people out there who deserve a chance than currently can find one.

 

 

As your company grows, do you plan to keep it locally owned and based in downtown Portland?

 

That's a good question. It fundamentally boils down to how long Portland is the place where my team wants to work and the business situation remains tenable. Portland still has a lot to offer: good public transportation, great food options and decent housing options (we haven't moved to multiple roommates and subleases passed along like in San Francisco). The educational system will be the next big challenge for my young team members, who in many cases are starting families.

 

This year we are crossing a milestone of opening a new office in Los Angeles and having two of our team members start remote work in other states. Metal Toad is an Oregon corporation, though the anti-business rhetoric here is certainly something I am paying attention to.

 

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California Dreaming

 

Earlier this month, California's state Senate passed a single-payer health care system, an attempt to end private health insurance. The bill passed the senate by a vote of 23-14, with only four Democratic senators voting against the measure.

 

When the bill passed, lots of people around the country were excited, especially those on the left. The bill was lauded both by the usual suspects, and also by some unusual suspects. The Nation magazine wrote that the bill's sponsor, RoseAnn DeMoro, executive director of the California Nurses Association, "is right to say that: 'This is a banner day for California, and a moral model for the nation.'"

 

Even the editorial page of the Wall Street Journal jumped in with mock support of the bill: "California's state Senate recently passed a single-payer health care bill, and we're warming to the idea as an instructive experiment in progressive government. If Democrats believe the lesson of ObamaCare is that the government should have even more control over health care, then why not show how it would work in the liberal paradise?"

 

Despite the interest on both sides, as of last week the experiment is on hold. California Assembly Speaker Anthony Rendon refuses to bring up the measure in the 2017 legislative session, believing the bill, whose potential costs are estimated as high as $400 billion annually, has not been well thought out. Gov. Brown concurs: "I recognize the tremendous excitement behind the measure, but fundamental questions remain unanswered."

 

For those disappointed in the quality of the health care debate that is now taking place in the nation's capital, a potential California single-payer experiment could indeed be "instructive." Sure it's a little scary when the world's seventh largest economy wants to experiment with nearly one-fifth of its GDP. But why not? Why not let the states serve their traditional roles as laboratories? Why not run five different state experiments simultaneously?

 

Especially since Capitol Hill's approach to fixing our health care mess is, to Sen. Rand Paul's mind, putting an inadequate Band-Aid on ObamaCare: "It's a false promise ... to say, 'Oh, yes, insurance premiums are going to go down but we're keeping 10 of the 12 mandates that caused the prices to go up.' It's a foolish notion to promise something you can't provide."

 

The Left is excited about the potential of California being used as a laboratory for single-payer because they believe that heath care is a "right" and that it ought to cost about half of what it costs now, say 10 percent of GDP instead of 18 percent. And, of course, we all know that government runs a tight financial ship in comparison to the private sector. As a matter of policy purity, the right should also be excited about the idea of states being used as laboratories to see if it's possible to once again establish a healthy and competitive insurance market.

 

Maybe the time has come to experiment with different approaches, using the states as laboratories. And what better state to go first than California? Or would we rather just stumble into a national singer-payer system together, where only the rich will be able to afford private health care? Because that is the direction we are heading -- make no mistake about it.

 

A Masterpiece of Cronyism

By Eric Fruits

 

Just when you thought there couldn't be anything worse than the Oregon Legislature's attempt to impose an unpopular gross receipts tax, our representatives are close to passing a tax increase targeted directly at small businesses and entrepreneurs.

 

As part of the "grand bargain" of the 2013 special session, the legislature approved a new lower tax rate on pass-through income. Owners of S-corps, LLCs, partnerships and sole proprietorships currently don't pay corporate income taxes. Instead, they pay personal income taxes on the business profits that "pass through" to them as owners. The idea was to encourage the growth of small business and give a boost to budding entrepreneurs in the state.

 

HB 2060 would gut that grand bargain by imposing tough restrictions on the companies that could claim the lower pass-through rate. Under the grand bargain, a company would qualify if it had at least one employee who is not an owner. HB 2060 would hike that requirement to a minimum of 10 full-time, year-round employees. That's a very steep hurdle for many small and growing businesses.

 

Even worse, HB 2060 limits the lower pass-through rate only to those preferred industries with a strong lobbying presence in the legislature. Only owners of companies in the agriculture, mining, manufacturing, wholesale trade, transportation and warehousing, information, or accommodation and food services industries would qualify for the lower pass-through rate. Small shop owners, daycare providers, architects, landscapers, contractors and doctors are just some of the small businesses that would be taxed at a higher rate.

 

There's an old political adage: "If you're not at the table, you're on the menu." It's as true as ever in today's Oregon Legislature.

 

If there's any doubt that the proposal guts the promise of the grand bargain, the nonpartisan Legislative Revenue Office predicts that more than 80 percent of the businesses currently claiming the lower tax rate for pass-through entities would be disqualified from the lower rate under HB 2060. LRO calculates HB 2060 will raise taxes on S-corps, LLCs, and partnerships by approximately $200 million in the 2017-19 biennium.

 

In defending HB 2060's tax increase on small business, Oregon State Senator Mark Hass noted his surprise that "suits and scrubs" -- doctors and lawyers -- were claiming the lower tax rate promised by the grand bargain. Hass said that was never the intent of the lower rate. However, LRO's analysis of the measure in 2016 shows that the revenue impacts were exactly the same as what LRO predicted three years earlier. There were no surprises. If LRO's calculations are correct, the grand bargain performed precisely as predicted.

 

In its endless quest for more money to fund an ever-growing government, the Oregon Legislature is now targeting tax increases on the state's smallest and most fragile businesses. By favoring some industries over others, HB 2060 is a masterpiece of cronyism that rewards lobbying efforts over economic activity. If small business doesn't claim a seat at the table, it can expect to be a permanent addition to the menu.

 

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